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Investing in DRIP's
Date Added: September 1st, 2005
Article provided by TeenAnalyst.com
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A popular way to save is to invest in DRIP's. No, we're not talking about leaky faucets or anything. We're talking about Dividend Reinvestment Plans.
Many stocks pay out dividends to their shareholders. Dividends are basically small shares of the amount of money the company made that year. Dividends are usually pretty small...you typically make less than $1.00 for each share of stock that you own. But they add up, especially if you use them to buy more stock. That's where dividend reinvestment comes in.
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If you invest the money that you make from dividends into more shares of that stock, then the next year you will make even more in dividends. It might not seem like much money at first but if you keep doing this over the course of 5, 10, 20, or even 50 years, it really adds up!
DRIP's are usually bought directly from the company or through a transfer agent. DRIP's allow you to invest a certain amount of money each month into the stock and the dividends are then reinvested automatically. The ability to buy the stock directly is nice because it cuts out the middleman (the broker) so your commission is much lower, usually only a buck or two.
Unfortunately, DRIP's have their downsides too. The biggest one I can think of is that it can be a little harder to sell the stock. Unlike many internet brokers, transfer agents can't execute trades with only a few minutes notice. Sometimes it takes up to a week for you to sell the stock. But if you're a long-term investor, and I hope you are, this shouldn't make a big difference to you.
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Not all companies offer DRIP's that you can buy directly from the company. In fact, there are only about 100 of them. But if you would like to still reinvest the dividends, many brokers offer similar plans. ShareBuilder.com also allows you the option to reinvest any dividends you earn. I encourage you to take advantage of this if you have a long-term horizon.
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Another Great Site!
Be sure to head over to TeenAnalyst for lots of great investment articles!
TeenAnalyst.com
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